Deals have to be properly structured so that energy cost
savings can pay for the investment in technology, says Simon
Corbett of Siemens Financial Services.

It appears UK financiers and government alike have woken up to
the practical challenges of boosting transition to a low carbon
economy and how to afford it. The Finance and Leasing Association
is bringing leading financiers together to share experience and
develop the market. The Carbon Trust has partnered with private
finance to extend and expand its small business financing scheme.
The Green Investment Bank, which will co-fund low carbon
infrastructure projects, seems to be going ahead. And so it goes
on.

In truth, there is nothing sudden
about this phenomenon. Cooperative Financial Services have been
financing low carbon projects for many years. Siemens has been
publishing its Environmental Portfolio record on its annual report
dating back to 2008. The important cusp point reached today,
however, is the realisation by government, public sector and
private sector, that the bulk of funding for converting to energy
efficient and low-carbon technologies will come from the private
sector. Business people make considered and long-term decisions on
financial arrangements which tend to be stable and sustainable over
time. That is where the transparency afforded by asset finance
becomes so interesting for financial directors and financiers.

Siemens’ recent research shows a
clear picture of pent-up demand, held back only by corporate
concerns about the affordability of energy efficient upgrades. 44%
of UK firms say half their equipment is already energy-efficient,
but 65% say further investments are being held back because of
affordability concerns. Using private sector capital and liquidity,
many energy-efficient projects can be structured so that the
technology investment is totally, or largely, paid for through the
energy cost savings or earnings gained through the new
installation. In the manufacturing context, industrial motors have
vast potential for saving energy. Motor and drive technology
accounts for two-thirds of industrial energy consumption.

The potential is there – especially
for auxiliary processes that do not serve production directly. Such
processes include, for example, the preparation and transport of
auxiliary materials, air conditioning and waste removal, as well as
pumps for heating, ventilation and air conditioning. The technology
for saving exists – but high acquisition costs for energy-efficient
industrial drives can put off many managers – yet the purchase
price accounts for less than 3% of total costs over the equipment’s
lifetime. Energy costs, by contrast, account for more than 95%.

Input tariffs have changed several
times in the last decade. Since this factor directly affects the
rate of payback from on site power generation projects, the finance
community really would like to see a long-term tariff mechanism put
in place, along with risk sharing, incentives and regulations –
then kept consistent over a period of many years.

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In short, private sector finance,
and asset finance in particular, are playing a key role in enabling
conversion to a low-carbon economy – with some government
encouragement. However, structuring the terms of these deals
requires real experience, to accurately model reliable risk,
technology performance, and rewards for end-user and financier
alike.